Wednesday, March 08, 2006

La la and Section 109

The San Francisco Chronicle had this story yesterday about a new service for CD swapping. Although it doesn't refer to Section 109 of the Copyright Act directly, that is obviously the relevant section:

"Former Yahoo chief product officer Geoff Ralston's record collection ranges from Joni Mitchell to Jimmy Buffett, the Beach Boys to the B-52s. In the past few months, it's also expanded to popular but lesser-known groups such as Death Cab for Cutie, Fountains of Wayne and the New Pornographers."I've experienced more new music in the last six months than in the last 15 years," Ralston said. That's because Ralston is on the board of La la, a Palo Alto startup that is introducing a site it believes offers a legal alternative to sharing music online. It's a virtual place where consumers can come together and trade their used CDs, much like going to a used-record store.Part MySpace, Netflix, eBay and iTunes, La la incorporates pieces of each: Users list online the CDs they both want and have. In the process, they find others who share the same taste in music. Then, when one user requests a CD that another person owns, the owner drops it in the mail in a pre-paid envelope. The receiver is billed $1, plus 49 cents for shipping; the shipper pays nothing.The service, which is still being tested, comes as the music industry continues to wrestle with declining CD sales and illegal file sharing on the Internet. Just last week, the Recording Industry Association of America filed another round of lawsuits, going after 750 people who it says stole music online.In autumn, Sony created an uproar after customers found its CDs incorporated software meant to curtail excessive copying, but which opened their computers to spyware and viruses. Meanwhile, getting music online continues to grow, with the iTunes music store hitting its 1 billionth song download last month."There is a transition going on, from media that is hard plastic, that has weight to it, to all-digital media, where increasingly people are acquiring and listening to music without it being on a disc," said Ralston. "La la is taking advantage of both sides."La la offers customers access to about 1.8 million albums, more than what's available on iTunes and at local retailers. It also seeks to create online communities of users who enjoy the same music, providing connections to people who have similar record collections."This is meant to be better than iTunes," co-founder Bill Nguyen said. "If Apple had done it better, then we wouldn't have built this."La la avoids copyright issues because swapping used CDs is legal, while sharing copyrighted music online is not. For the $1 it charges a user to receive a CD, La la gives 20 cents to the artist.For every CD a user ships, the user receives one in return. An internal algorithmic system -- that the founders liken to karma -- tracks how often a person sends a CD, if it's sent on time and if the CD is in good shape. Someone with "bad" karma will probably not receive a CD as quickly as someone with "good" karma. Sending burned CDs, a big no-no, could lead to getting kicked off the site.La la can't, however, stop folks from receiving a CD, making a copy of it and then trading it again. That, in fact, is how about 30 percent of consumers get their music these days, according to the NPD Group, a market research firm in Port Washington, N.Y. A little more than 50 percent of consumers buy CDs, about 16 percent use illegal file-sharing networks and about 4 percent download music legally on services like iTunes."What's been a challenge for the industry is people swapping CDs and ripping and burning copies of them," said Russ Crupnick, an analyst with NPD Group. "It's a big piece of how people are acquiring music."La la said it doesn't condone users doing this, but it could prove to be one of the company's challenges. "I don't see how the RIAA is going to like it, but they don't have a choice because it doesn't infringe on copyright," Ben Bajarin, an analyst with Creative Strategies. Nguyen said the company has no plans to expand beyond music. Incidentally, another Silicon Valley startup, Menlo Park's Peerflix, uses a similar model to trade DVDs.La la is backed by Bain Capital and Ignition Partners, which pumped $9 million into the company. It also landed Anselm Baird-Smith, a former eBay architect, as one of its co-founders. Mr. Baird-Smith, who has two sisters and a brother who are professional musicians, opted to take a chance on La la."I didn't realize so many people loved me," he said. But "it's about music and about being good to the artist and me personally being able to bring something to La la."

The only possible hitch is the horribly mucked-up language of Section 109(b)(1)(a):

"Notwithstanding the provisions of subsection (a), unless authorized by the owners of copyright in the sound recording or the owner of copyright in a computer program (including any tape, disk, or other medium embodying such program), and in the case of a sound recording in the musical works embodied therein, neither the owner of a particular phonorecord nor any person in possession of a particular copy of a computer program (including any tape, disk, or other medium embodying such program), may, for the purposes of direct or indirect commercial advantage, dispose of, or authorize the disposal of, the possession of that phonorecord or computer program (including any tape, disk, or other medium embodying such program) by rental, lease, or lending, or by any other act or practice in the nature of rental, lease, or lending. Nothing in the preceding sentence shall apply to the rental, lease, or lending of a phonorecord for nonprofit purposes by a nonprofit library or nonprofit educational institution. The transfer of possession of a lawfully made copy of a computer program by a nonprofit educational institution to another nonprofit educational institution or to faculty, staff, and students does not constitute rental, lease, or lending for direct or indirect commercial purposes under this subsection."

This language was much clearer before software was added to it: in its original incarnation, dealing with record rental, it was much simpler to parse. Bottom line, from the description above of La la, it doesn't appear to run afoul of the section since there title to the copy is parted with and there is nothing like the wink-wink-nudge-nudge that led to the original record rental ban.

12 comments:

Clever business plan. The company does not run afoul of 109(b)(1)(A) because it is never "the owner of a particular phonorecord." Instead, the members are the owners of the phonorecords.

As to the members, however, they are not trading their phonorecords "for the purposes of direct or indirect commercial advantage," so they don't run afoul 109(b)(1)(A) either. (At least I don't think so - what's the legislative history on "indirect commercial advantage"?)

If the members are not infringing, then the company can't be secondarily liable, either.

This model can potentially encourage record purchases at retail and is essentially a virtual used record market identical to Amoeba Music but at considerably lower cost to the consumer. Used record stores see the same physical product over and over again with a huge proportion of the buyers taking the disk home, ripping the content to a hard drive and then reselling the disk the next day. The consumer ends up paying a "rental" fee from $2 to $8 dollars on each disk. La la's a lot cheaper.

If in fact 20 cents "goes to the artist" (does it get mailed to the record company; to the frequently sleazy manager who was kicked out the door a year ago; to the one band member they can find listed in the Glasgow pink sheets)then the model is superior in that respect as well. There is a very checkered history among the record companies in their treatment and remittance of royalties on re-issues, record club sales and niche catalog. This would give the artist a bite at the apple. Of course, there is the fascinating-to-legal-nerds question of whether the artist would have to send the check from La la to the record company.

The bad:

Unfortunately, this model is likely to very quickly hit the wall and has modest growth prospects unless it is combined with other entertainment product distribution models (or maybe Craig's List). Netflix is at slow to no growth already. The consumer subset willing to use the US mail is probably static - - though dedicated. The number of avid rabid music fanatics who are also looking for bargain basement values is of only a certain size. The fact that they have relatively large investors already and a super star techie suggests that it will attempt to scale beyond its reach and topple.

The uglies:

Easy to be negative about anything that is still so new and unproven, but its also an attempt to suggest to the overactive music business that it not get bent out of shape and try to plug this hole as well as the analog ones.

I too would like to see how it shakes out in practice. The ban on record rentals in 1984 arose out of stores that "sold" CDs, but accepted them back the next day for a $1 fee, coupled with ads that said "Never ever buy another record again." Those sort of operations are subterfuges for piracy and don't fall within the first sale doctrine, but a service that puts people genuinely wishing to sell a used CD to another would be OK. La la does seem like a marriage between Netflix and Craig's List

Prof. Patry--I don't see a material difference between the stores you describe, and ordinary new/used record stores.

Let's say we have a store that buys and sells new and used records. If it sells a record to a customer for $10, parting with title, and is willing to buy the record back for $9 (assuming good condition, etc.) regaining title, then why would this be construed as rental? Particularly since the only thing that seems to be distinguishing it from any other store is that it is willing to offer more generous prices when it buys copies. The customer is never obligated to bring back the CD and sell it to the store. He can keep it, or sell it elsewhere, or whatever.

I don't think that the relevant provisions in 109 are giving copyright holders the ability to dictate how much the store is allowed to pay to gain possession and title; only that they can't rent, etc. I suppose that the store would need to be cautious as to how it portrayed itself, but that's not an insurmountable burden.

I'd be interested in your reaction to a modification of this idea: What if the store also sold digital audio recording media (in the AHRA sense -- let's say blank Audio CDRs) along with the CDs?

Those sort of operations are subterfuges for piracy and don't fall within the first sale doctrine...

Piracy? Subterfuge! There was a model a while ago that floated an entire segment of the entertainment business - - video rentals (involved buying a copy and renting it out and no one amended the copyright act to stop it) - - and now its going on over the Internet! Back in pre-history, book stores did the same thing. It was only those music folks who were protectionists.

Calling a soundrecording rental scheme, a business model used in major markets like Japan, piratical is a little charged. Maybe the correct inquiry is whether the prohibitions in 109(b)(1)(a) make sense anymore for music.

The CD-R question begs the issue. After the content lobby plugs every "hole," constrains every consumer use and turns every purchase into a revocable license, who is the pirate and where is the subterfuge? Consumers are responsible citizens as well and actually deserve certain rights under the Copyright Law. There’s even the likelihood the content folks would make more money with happy consumers who think they are respected.

Dear Anonymous:I don't see a material difference between La la and ordinary resale stores, but I do see a big difference between ordinary second hand stores as they are no constituted and as they were constituted in 1984; the latter were not sales in any real sense, but lending expressly for copying, as the ads so blatantly proclaimed. Selling AHRA blank recording media, assuming that the royalties are paid doesn't by itself change the equation. What would change the equation would be a generous return policy.

Some used record stores (or I guess that's CD stores, now) still occasionally try some sort of "burn it and return it" marketing scheme. Although few if any of these cases get litigated, it's the combination of a marketing scheme that portays the arrangement as being one "in the nature of" rental, lease or lending. A preferential, guaranteed buy-back price for CDs purchased through the store would also seem to be a contributing factor. (The mere fact that a used CD store paid top dollar for used CDs, alone, wouldn't necessarily mean the arrange was in the nature of a rental, as one commenter suggested.)

Fred - By the way, I'm not sure if your comments about ownership and commercial advantage were in response to Patrey's notes or not, but just to clarify. Although I think your overall assessment is correct -- these guys don't seem to run afoul of 109 -- I don't think it matters either that La La is never "the owner of a particular phonorecord" or that the individual customers aren't doing it for commercial advantage or private financial gain. Sec. 109(b)(1)(A) is an exception to an exception. The general rule is that you can't distribute without permission. Sec. 109 is an exception saying that the owner of a particular copy or phonorecord can redistribute (sell, rent, destroy, etc.) that copy without permission. Then 109(b)(1)(A) creates an exception-to-the-exception, carving out audio/music and software, and saying that for these works, the owner of a particular copy or phonorecord can still "redistribute" that particular copy without permission, as long as the redistribution is not by for-profit leasing, rental, or lending, or something like them. So reselling CDs that you own is still OK. Lending them for free is still OK. But renting them out for money is not.

So I think that if La La started out with a huge batch of CDs that it owned, and used those to "seed" the business by selling them to customers, they'd still be in the clear under 109, as long as they didn't claim to retain title in the particular phonorecords. As long as the business model doesn't provide some sort of right of the customers to sell the CDs back to La La, it seems OK. As for the customers, it shouldn't matter if their purposes could be characterized as "for ... commercial advantage or private financial gain" (direct or otherwise), as long as what they're doing isn't in the nature of rental or lending (and based on the description and some other things I've read about La La, it doesn't seem to be -- it looks like the transactions indeed are outright sales). This seems rather important, because if the legality of the enterprise turned on whether the customers were acting for "direct or indirect" commercial advantage or private financial gain, a court might well find such intent here on the part of customers. They are, after all, getting money, and/or a bargain-priced CD, out of the deal.

Oh, and to the anonymous commenter taking issue with the "subterfuges for piracy" comment: There's no reason that rental operation necessarily have to be subterfuges for infringing copying. I certainly wouldn't say libraries or video stores (well, most video stores) could be characterized that way. But in fact a lot of record/CD rental stores used to (and a handul continue to) operate with that sort of intent. It's something that will almost always be an issue when the kinds of works you're renting are especially easy to copy (like CDs, compared to video games or DVDs, which are marginally harder to copy). By the way, the reason CD rental stores are so big in Japan may or may not have anything to do with "piracy." But Japanese copyright law expressly provides a rental right (which US law does in a sort of backward way), and Japanese collecting rights organizations collect fees from rental stores which get paid out as royalties.

Analoghole: VHS, Beta video and DVD's are not marginally harder to copy than CD's and certainly VHS was every bit as easy to copy in the mid-80's as a CD or vinyl phonorecord. Games are much harder to copy and starting with the early platforms were purposefully designed to be married to specific hardware as a way of limitting leakage from darknet exchanges and it worked very well.

The irony is that now, without protectionist rental rights, many DVD's cost less at retail for purchase than do most CDs. DVD sales and rental revenues have skyrocketed while CD's have withered. 109 may not be to blame but the attitude of protectionism on the part of the music industry certainly is a factor in consumer diversion to other entertainments where they are more welcomed. Lawyers don't have to understand or even care about market forces, but lawyers who want to change the law or who wish to comment on the appropriateness of commercial models should understand that the market is a better policy maker than most legislative bodies (and the lobbyists who try to control them).

Your note to Fred was very accurate and points out out how limitted the exceptions are. Almost like a private bill. If these ecxceptions were good policy, instead of transitory good poltics, the exception would be the rule - - which it is not.

There is no fair use prohibition on copying an entire work, and I tried to provide some level of comment for it, but perhaps someone will defend me if I wam sued.I agree that there is no reason rental operations should be regarded as subterfuges for piracy and I doubt many are. "Burn it and return it" marketing schemes and a preferential, guaranteed buy-back price for CDs purchased through the store are exactly what the rental ban was intended to reach

I can see the position that LaLa's model falls squarely under First Sale. The question I have is part of the so called "predominant purpose" test that came out of the Grokster ruling. As best I can tell that ruling implied that if the "predominant purpose" of a service is to facilitate copyright infringement (which Grokster's purpose certainly was), then it is illegal. In the case of LaLa because such a large percentage of their audience (in my opinion it will be well over 50%) will be using their service primarily to rip and trade CDs without removing the content from their PC, iPod, etc. when they trade the CD on, then it seems to me that there is a fairly decent argument by the record labels that the predominant purpose of LaLa is to infringe copyright (i.e. you use the service to get CDs, rip them to your iPod and trade them out to get more). In that case, it would seem that the First Sale doctrine and the Grokster ruling could potentially be at odds and I could see the record labels using that position as the justification for a challenge of the LaLa model.

I very well could be missing something in my analysis? Anyone have any thoughts or comments?

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